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Insurance Demand II: Decisions Under Risk with Diversification Possibilities

  • Peter ZweifelEmail author
  • Roland Eisen
Chapter
  • 4.5k Downloads
Part of the Springer Texts in Business and Economics book series (STBE)

Abstract

In Chap. 3, risk management was restricted to one of two alternatives: Either leave the asset in question without insurance protection or buy a certain amount of insurance coverage. This narrow view may be appropriate for the decision situation of a household who owns just one marketable asset (e.g. a house). Closer inspection shows that even in this case, two more assets should be considered, namely health and human capital (wisdom). This gives rise to the question of whether the existence of these other assets might influence the decision to buy insurance coverage for the home. Consider a household whose human capital and hence labor income depends heavily on regional economic development. To a certain degree, it can diversify its assets by buying an apartment in a neighboring region that however has different economic prospects. In this way, it can reasonably expect that its marketable asset does not lose value at the same moment when its wage income goes down. Obviously, risk can be reduced or mitigated through diversification, an additional means of risk management.

Keywords

Call Option Share Price Capital Asset Price Model Strike Price Monetary Unit 
These keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.

Copyright information

© Springer-Verlag Berlin Heidelberg 2012

Authors and Affiliations

  1. 1.Department of EconomicsUniversity of ZurichZurichSwitzerland
  2. 2.MunichGermany

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